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Goal of economic development? Making the pie bigger

What is the role of state government, or any government, for that matter? Carrying the mail and defending the beaches has traditionally been the role of the federal government.

Protecting property rights and maintaining law and order has been the role of state and local government. However, the times, they are a changing.

Now, state and local politicians have assumed the role of chief economic development officers in addition to their traditional duties. No one, it seems, can be elected to public office without a strong platform advocating more and better jobs for the district.

Another sign of the times is communities buying jobs much the same way one would buy a loaf of bread. Governments buy jobs through tax incentives, commitment of training funds and providing facilities at less than market rates.

What does it all mean? When, if ever, should governments “buy” jobs for their communities? In short, what really constitutes economic development?

Here’s Joe’s short course in Economic Development 101. To be economic developmentally correct, decisions should be made with some attention given to the impact on the economy. To improve, or “develop,” the economy, actions should result in a bigger economic pie and bring additional stability to the business environment with minimal cost to the community, both financial cost and damage to the environment. Making people happy is a personal responsibility and beyond the scope of economic development.

How do we make the economic pie larger? The economic pie is made up of all financial transactions that occur within the marketplace. Thus, the more dollars that change hands, the bigger the pie. There are lots of ways to measure economic growth, but I like to simplify the definition and just consider per capita income, i.e. the average personal income for all workers in the state. The more money people make, the more money they spend and the economic impact reverberates throughout the economy.

Thus, one gauge to be considered when making economic development decisions is the impact on per capita income. Will more people make more money as a result of this action?

People are paid for the value of their contribution to the workplace. Modest skills make a modest contribution and thus earn a modest wage. Increasing skills increases the value of the workers’ contribution and consequently, wages are also raised. This is why it is so critical to educate and train our workforce and then educate and train them some more. The only other option for increasing per capita income is for the worker to work longer hours, a decidedly unpopular solution.

Lots of people learned the risk of putting all their investment eggs in a WorldCom basket. Similarly, we should beware of putting too many of our economic development eggs in a single industry, such as automotive manufacturing. If we get overloaded in one industry and that industry suffers a hiccup, then our entire economy is disrupted. Look no further than Detroit to understand this concept. Closer to home, Northeast Mississippi has gotten dangerously dependent on furniture manufacturing and that sector is feeling the affect of competition from cheap foreign labor.

Here’s a bold new thought. Since 80% or more of all new jobs come from expanding existing businesses maybe we should direct our efforts toward more support of the businesses we already have. Naturally, helping the home folks doesn’t carry the political flash and dash of landing a new automotive assembly plant, but nonetheless, if economic development is the goal, perhaps it’s a better choice.

What about the cost of economic development? Should the state really be paying $75,000 each for job such as we did for Nissan? Where will the money come from to pay that cost?

I was, and continue to be, a strong supporter of bringing Nissan to Mississippi. I believe that locating the Nissan plant here put us on the economic development map. However, I seriously question whether we need to pay to locate another plant here. For one thing, finding qualified, trainable workers is as hard as a rock here in our state. I wish this wasn’t true, but it is.

Secondly, the taxpayers ultimately pay all government cost. The few of us who remain on the Mississippi tax roles will have to divvy up the cost of Nissan and all other projects funded by the state. Whether it’s paid from general fund dollars or through the issuance of bonds, the end result is the same. It’s lousy economic development policy if the per capita income gain is gobbled up by an equivalent increase in taxes.

Lest I end this column on a negative note, I’ll wrap-up with what I believe could be a real opportunity for our state. Wages and profits increase the further along the chain one moves from raw material toward finished product. Here in Mississippi, we ship far too much raw material off to other places for processing into finished products. We could raise our per capita income a lot by attracting industries that would process our timber and agricultural raw materials into finished products.

Higher wages? Buying jobs? Economic stability? It’s really not as complex as it seems. Just keep your eye on the affect decisions have on per capita income and weigh that against the cost and you’re on the road to being a real economic developer.

Thought for the Moment

The best doctor in the world is the veterinarian. He can’t ask his patients what is the matter — he’s got to just know. — humorist Will Rogers (1879-1935)

Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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